2022 (5) TMI 819 - AT - Income Tax

TP Adjustment - loan advanced to the Associated Enterprise AE should have been bench marked with interest rate to its AE with SBI PLR as the loan has been advanced from India in Indian currency of the recipient AE in US dollars - CIT-A deleted the addition - HELD THAT - Considering the past history of the assessee wherein the appellate authorities have followed the decision of the Hon'ble Jurisdictional High Court in the case of Cotton Natural 2015 (3) TMI 1031 - DELHI HIGH COURT we do not find any reason to interfere with the findings of the ld. CIT(A). The captioned appeals by the revenue are, accordingly, dismissed.

Summary

Issues:
- Dispute over benchmarking interest rate on loan to Associated Enterprise (AE) with SBI PLR.
- Application of LIBOR rate for benchmarking international transactions.
- Consideration of credit rating for determining appropriate markup on interest rate.

Analysis:

Issue 1: Benchmarking Interest Rate on Loan to AE
The Revenue contested the reliance by the Commissioner of Income Tax [Appeals] on a previous case unrelated to the specific issues raised in the current case. The Revenue argued that the SBI Market Lending Rate should apply as the loan was given from an Indian Rupee Account. The Tribunal found that the Revenue's main contention was that the loan to the Associated Enterprise (AE) should have been benchmarked with the interest rate to its AE with SBI PLR. However, the Tribunal noted that no fresh loan was advanced during the relevant year, and the past assessment history was crucial in determining the benchmarking of interest on the loan to the AE.

Issue 2: Application of LIBOR Rate
In previous assessment years, the Commissioner of Income Tax [Appeals] had consistently applied the LIBOR rate plus basis points for benchmarking international transactions. The Tribunal referenced specific findings in Assessment Year 2010-11, where the judicial pronouncements of the Hon'ble Delhi High Court were followed to allow the grounds of appeal. Similar decisions were made in subsequent years, where adjustments were directed based on the LIBOR rate plus specific basis points, as done by the assessee. The Tribunal upheld these decisions, considering the precedent and the consistent application of the LIBOR rate in such cases.

Issue 3: Consideration of Credit Rating
In a separate issue related to credit rating, the Tribunal referred to a case where the borrower, not the lender, should bear transaction or hedging costs. The Tribunal emphasized the importance of considering the credit rating of the entity receiving the loan, especially in cases involving new entities or entities with poor credit ratings. The Tribunal highlighted the need for appropriate markup for credit rating, distinct from transaction costs, and directed the issue to be reconsidered based on credit rating criteria. This decision was made to ensure fairness and justice in determining the markup for credit rating over the LIBOR rate of interest.

In conclusion, the Tribunal dismissed the Revenue's appeals, citing the past history of following judicial decisions and the consistent application of benchmarking methods for international transactions and credit rating considerations. The orders were pronounced in the open court, and the appeals of the Revenue were dismissed for all the relevant assessment years.